Loyalty works both ways

Private Property South Africa
Cathy Nolan

When it comes to home loans, conventional wisdom has been to shop around for the best deal. And in principle one can’t find too much fault with this. Ironically though, the net result of applications to more than one bank may actually be a more costly loan.

Considering that banks can theoretically save a small margin on the interest rate, there are limits to how cheap they can go on these, as there are lower limits to the cost of funding bonds as well as a myriad operating costs.

The competitive nature of the banks has by-and-large diluted the benefit that clients get out of the additional effort, with interest rates on home loans being arguably the most competitive of all the various types of loans available.

There are even a number of instances where shopping around may be harmful to a potential customer. Consider this: assessing a new home loan application is a very expensive process. Banks have to employ skilled labour and use sophisticated systems to assess the risk of the applicants and properties before being able to make a decision. This operational cost needs to be incurred whether the application is finally taken up or not, resulting in a high level of wastage. All of these processing costs, both on loans taken up and those not taken up, must ultimately be paid for by home loan clients when taking up a loan, through the combination of an initiation fee as well as through the interest repaid on the loan amount to recover the remaining cost of banking the deal indirectly.

When considering more than one bank, therefore, a potential customer increases the overall cost of processing new applications, and that cost is distributed amongst customers who take up the loan with the respective bank. Herein lies a major challenge for home loans banks: how to find a way of reducing processing costs by increasing the ratio of loans taken up versus those that are not. One of the potential ways of doing this is for a bank to focus on the applicants who bank with them. “Own bank” clients tend to be less costly in that they are more likely to take up their “own” bank’s home loan grant after it has incurred the processing costs.

FNB Home Loans’ experience is that, for the last six months, more than 30% of its bond applications have been submitted to multiple banks for approval. However, on average, less than 10% of “other bank” customers who applied at FNB ended up taking an FNB home Loan, compared to around 25% of FNB customers.

In addition, FNB finds it less costly to process an “own” client’s application, resulting in their customers being offered a significantly better deal from FNB than competitor bank customers. Some banks are now turning away non-banked customers, some even before an application is assessed.

When a bank’s transactional clients are easier to assess, therefore proving to be a lower risk with lower default rates, the reality is that the bank can price them slightly lower than seemingly comparable non-bank clients who come with a slightly higher risk due to the difficulty in assessing their creditworthiness. This ability to offer “own” clients a lower risk-related interest rate probably goes some way to explaining why a higher percentage of “own” clients end up taking up loans with their original bank.

But the potential advantage of having one’s home loan at the same bank as one’s transactional banking often goes further with numerous options being offered to help reduce the bond amount and interest. While monthly interest saved like this may often seem like small and trivial amounts.

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